Why criminals can t hide behind Bitcoin, Science, AAAS

Bitcoin, the Internet currency beloved by pc scientists, libertarians, and criminals, is no longer invulnerable. Spil recently spil Trio years ago, it seemed that anyone could buy or sell anything with Bitcoin and never be tracked, let alone busted if they broke the law. “It’s totally anonymous,” wasgoed how one commenter waterput it ter Bitcoin’s forums ter June 2013. “The FBI does not have a prayer of a chance of finding out who is who.”

The Federal Schrijftafel of Investigation (FBI) and other law enforcement begged to differ. Ross Ulbricht, the 31-year-old American who created Silk Road, a Bitcoin market facilitating the sale of $1 billion ter illegal drugs, wasgoed sentenced to life ter prison te February 2015. Te March, the assets of 28-year-old Czech national Tomas Jirikovsky were seized, he’s suspected of laundering $40 million ter stolen Bitcoins. Two more fell te September 2015: 33-year-old American Trendon Shavers pleaded guilty to running a $150 million Ponzi scheme—the very first Bitcoin securities fraud case—and 30-year-old Frenchman Mark Karpeles wasgoed arrested and charged with fraud and embezzlement of $390 million from the now shuttered Bitcoin currency exchange Mt. Gox.

The majority of Bitcoin users are law-abiding people motivated by privacy concerns or just curiosity. But Bitcoin’s anonymity is also a powerful implement for financing crime: The virtual money can keep shady transactions secret. The paradox of cryptocurrency is that its associated gegevens create a forensic trail that can all of a sudden make your entire financial history public information.

Academic researchers helped create the encryption and software systems that make Bitcoin possible, many are now helping law enforcement nab criminals. Thesis experts operate ter a fresh field at the crossroads of laptop science, economics, and forensics, says Sarah Meiklejohn, a pc scientist at University Collegium London who co-chaired an annual workshop on financial cryptography ter Barbados last month. “There aren’t that many of us,” she notes. “We all know each other.”

When Bitcoin very first emerged, law enforcement officers were “panicking,” Meiklejohn says. “They thought thesis technologies were dangerous and made it stiffer for them to do their job.” But spil the arrests and convictions have spinned ter, “there’s a constant shift toward observing cryptocurrency spil a implement for prosecuting crimes.” Even te the strange fresh world of Bitcoin, FBI Assistant General Counsel Brett Nigh said ter September 2015, “investigators can go after the money.”

Unlike money issued by governments, Bitcoin has no Federal Reserve, no gold backing, no banks, no physical notes. Created te a 2008 academic paper by a still unknown person using the name Satoshi Nakamoto, Bitcoin “is an intellectual artifact,” says Patrick McDaniel, a rekentuig scientist at Pennsylvania State University (Penn State), University Park. “It’s the frontier of economics.”

Rigorously speaking, Bitcoins are nothing more than amounts associated with addresses, unique strings of letters and numbers. For example, “1Ez69SnzzmePmZX3WpEzMKTrcBF2gpNQ55” represents almost 30,000 Bitcoins seized during the Silk Road bust—worth about $20 million at the time—that were auctioned off by the U.S. government on 1 July 2014.

Those Bitcoins have bot split up and switched mitts numerous times since then, and all of thesis transactions are public skill. The past and present ownership of every Bitcoin—in fact every 10-millionth of a Bitcoin—is dutifully recorded te the “blockchain,” an ever-growing public ledger collective across the Internet. What remains hidden are the true identities of the Bitcoin owners: Instead of submitting their names, users create a code that serves spil their digital signature te the blockchain.

The job of keeping the system running and preventing cheating is left to a volunteer workforce known spil Bitcoin miners. They crunch the numbers needed to verify every transaction. Added to this is an evergrowing math task known spil “proof of work,” which keeps the miners fair. The calculations are so intense that miners use specialized computers that run hot enough to keep homes or even office buildings warm through the winter. The incentive for all this effort is built into Bitcoin itself. The act of verifying a 10-minute block of transactions generates 25 fresh Bitcoins for the miner. This is how Bitcoins are minted.

Just like any currency, Bitcoin’s real-world value emerges spil people trade it for goods, services, and other currencies. If you’re not a miner, you can only get Bitcoins from someone who already has them. Companies have sprung up that sell Bitcoins—at a profitable rate—and provide ATM machines where you can convert them into specie. And of course, you can sell something ter terugwedstrijd for Bitcoins. Spil soon spil both parties have digitally signed the transaction and it is recorded ter the blockchain, the Bitcoins are yours.

Spil Science went to press, Bitcoin’s market capitalization, a measure of the amount of money invested ter it, stood at $Five.6 billion. That money is very safe from theft, spil long spil users never expose their private keys, the long—and ideally, randomly generated—numbers used to generate a digital signature. But spil soon spil a Bitcoin is spent, the forensic trail starts.

By 2013, millions of dollars’ worth of Bitcoins were being exchanged for illegal drugs and stolen identity gegevens on Silk Road. Like a black market version of Amazon, it provided a sophisticated toneel for buyers and sellers, including Bitcoin escrow accounts, a buyer terugkoppeling forum, and even a vendor reputation system. The merchandise wasgoed sent mostly through the normal postal system—the buyer sent the seller the mailing address spil an encrypted message—and the webpagina even provided helpful tips, such spil how to vacuum-pack drugs.

Investigators calmly collected every shred of gegevens from Silk Road—from the pics and text describing drug products to the Bitcoin transactions that show up te the blockchain when the deals close. Ultimately, investigators needed to tie this string of evidence to one crucial, missing chunk of gegevens: the Internet Protocol (IP) addresses of the computers used by buyers or sellers.

The challenge is that the Bitcoin network is designed to blur the correspondence inbetween transactions and IP addresses. All Bitcoin users are connected te a peer-to-peer network overheen the Internet. Gegevens flow inbetween their computers like gossip ter a crowd, spreading quickly and redundantly until everyone has the information—with no one but the originator knowing who spoke very first.

This system worked so well that it wasgoed carelessness, not any privacy flaws ter Bitcoin, that led to the breakthrough ter the investigation of Silk Road. When Ulbricht, the ringleader, wasgoed hiring help to expand his operation, he used the same pseudonym he had adopted years before to postbode announcements on illegal drug discussion forums, that and other moments of sloppiness made him a suspect. Once FBI tracked his IP address to a San Francisco, ter California, Internet cafe, they caught him ter the act of logging into Silk Road spil an administrator.

Other criminals could take solace ter the fact that it wasgoed a slip-up, spil long spil you used Bitcoin cautiously, your identity wasgoed protected behind the cryptographic wall. But now even that confidence is eroded.

Among the very first researchers to find a crack ter the wall were the husband-and-wife team of Philip and Diana Koshy. Te 2014, spil graduate students ter McDaniel’s laboratorium at Penn State, they built their own version of the software that buyers and sellers use to take part te the Bitcoin network. It wasgoed especially designed to be inefficient, downloading a copy of every single packet of gegevens transmitted by every laptop te the Bitcoin network. “We dreamed to see everything,” Philip Koshy says.

If the gegevens flowing through the network were flawlessly coordinated, with everyone’s pc sending and receiving gegevens spil frequently spil the surplus, then it might be unlikely to listig Bitcoin addresses with IP addresses. But there is no top-down coordination of the Bitcoin network, and its flow is far from volmaakt. The Koshys noticed that sometimes a laptop sent out information about only one transaction, meaning that the person at that IP address wasgoed the proprietor of that Bitcoin address. And sometimes a surge of transactions came from a single IP address—probably when the user wasgoed upgrading his or hier Bitcoin client software. Those transactions held the key to a entire backlog of their Bitcoin addresses. Like unraveling a ball of string, once the Koshys isolated some of the addresses, others followed.

Ultimately, they were able to ordner IP addresses to more than 1000 Bitcoin addresses, they published their findings ter the proceedings of an obscure cryptography conference. It is unusual for an academic paper to cause both The Fresh York Times and the U.S. Department of Homeland Security to come calling. “It wasgoed crazy,” Philip Koshy says. Their mechanism has not yet appeared ter the official record of a criminal case, but the Koshys say they have observed so-called fake knots on the Bitcoin network associated with IP addresses te government gegevens centers ter Virginia, suggesting that investigators there are hoovering up the gegevens packets for surveillance purposes too. (The pair has since left academia for tech industry jobs.)

Spil criminals have evolved more sophisticated methods to use Bitcoin, researchers have followed apace. Meiklejohn—who says she regularly works with law enforcement but is “not comfy discussing the details”—was one of the very first researchers to explore Bitcoin “mixing” services. The basic idea is to protect the anonymity of transactions by exchanging many people’s Bitcoin stashes with each other, spil ter a shell spel. The forensic trail shows the money going te but then goes cold because it is unlikely to know which Bitcoins belong to whom on the other end. “So te principle, this is a solution to Bitcoin’s anonymity problem,” Meiklejohn says.

Bitcoin Foundation Vice Chairman Charlie Shrem (right) leaves the Manhattan federal courthouse ter Fresh York City ter January 2014. Shrem wasgoed straks sentenced to Two years te prison for laundering money on Silk Road.

But even mixing has weaknesses that forensic investigators can exploit. Soon after Silk Road shut down, someone with administrative access to one of the freshly emerging black markets walked away with 90,000 Bitcoins from user escrow accounts. The thief attempted to use a mixing service to launder the money, but wasn’t patient enough to hide the tracks, Meiklejohn says. “It’s difficult to shove large amounts of Bitcoin through mixing services secretly. It’s enormously noticeable no matter how you do it.” Thomas Jiikovsky, the man under investigation by Czech police, is suspected to be the thief ter question.

The beauty of Bitcoin, from a detective’s point of view, is that the blockchain records all. “If you catch a dealer with drugs and metselspecie on the street, you’ve caught them committing one crime,” Meiklejohn says. “But if you catch people using something like Silk Road, you’ve uncovered their entire criminal history,” she says. “It’s like discovering their books.”

Exactly that script is playing out now. On 20 January of this year, Ten fellows were arrested ter the Netherlands spil part of an international raid on online illegal drug markets. The dudes were caught converting their Bitcoins into Euros ter canap accounts using commercial Bitcoin services, and then withdrawing millions ter metselspecie from ATM machines. The trail of Bitcoin addresses allegedly linksaf all that money to online illegal drug sales tracked by FBI and Interpol.

If Bitcoin’s privacy shortcomings drive users away, the currency will quickly lose its value. But the request for financial privacy won’t vanish, and fresh systems are already emerging. “I don’t feel people have the right to know, unless disclosed, how much specie is ter my wallet, just like I don’t feel anyone should know what conversations I’m having with anyone else,” says Ryno Matthee, a software developer based ter Somerset, South Africa.

Matthee is part of a team launching a fresh anonymous online market called Shadow this year, which will use its own cryptocurrency, ShadowCash. The objective is not to facilitate illegal transactions, Matthee says. It will be up to the users, who administer the system, to police it, he says, but to help prevent manhandle, “we are going to attempt our best to filterzakje out known keywords for drugs or worse.”

Shadow is far from the only Bitcoin competitor. Scores of alternative cryptocurrencies now exist. And some experts predict that one may ultimately go mainstream. Some banks already rely on a cryptocurrency called Ripple for lodging large global money transfers. And the U.S. government “has bot engaging with the cryptocurrency community and learning from them,” says Bill Gleim, head of machine learning at Coinalytics, a company based te Menlo Park, California.

Gleim believes the federal government will kwestie its own cryptocurrency, “maybe spil soon spil late 2016.” If so, it is likely to require users to verify their real-world identities. That could defeat the purpose of cryptocurrency te the eyes of privacy advocates and criminals. Or maybe not: Te this technological spel of cat and mouse, the next budge may go to the criminals.

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